Decoding the Fed's "Long-Term" Riddle

What the Fed means by "long term" matters a lot... [Outsider Club Header] Jul 12, 2023 By Luke Burgess for the Outsider Club Decoding the Fed's "Long-Term" Riddle The most recent June jobs report showed us that while the job market still seems pretty strong, there are signs of things slowing down. In June, the job market added 209,000 jobs. Yet this was below analysts expectation and the smallest increase since December 2020. Despite fresh signs of a slowing jobs market, most traders think that the Federal Reserve will raise interest rates a little bit at its meeting this week. As of Tuesday, the CME FedWatch Tool shows a 95% probability of a 0.25-point hike. Economists are expecting an annual 3.1% inflation increase in July. This is a bit lower than the 4% increase in May. It’s a positive sign for the economy that inflation is getting closer to the Fed’s long-term 2% goal. But it’s important to remember the Fed’s 2% is a “long-term” goal. That means even if inflation fell to 2% in July, the Fed would still have work to do. The problem is, there’s no way for us to know exactly how much more would need to be done. Let me explain… The Federal Reserve basically has two jobs: to make sure there are as many jobs as possible and to keep prices stable. To do the second job, it wants to keep annual inflation around 2%. The Federal Reserve wants to keep inflation at 2% because it helps the economy stay stable and grow in a good way. This level of inflation helps avoid prices going down too much, which can make people not want to spend money and slow down the economy. How so? Well, when prices go down, people might wait to buy things because they think prices will be even lower in the future. The New Emperor of Energy Storage You’re looking at the future of a $3.3 trillion industry. Thanks to this groundbreaking innovation, clean energy can be fed to the power grid 24/7... Regardless of whether the sun is shining or the wind is blowing. I call it the "Newton Battery," and it crushes every other battery on the market. The Swiss and the Saudis are already using it. And grids across the globe will be using this battery before we know it. It’s all possible thanks to one tiny company’s patented tech. The best part is that 99% of investors have no idea that it just went public... [Get in on the ground floor now, before it's too late.]( Let’s say you live in a country with an economy where there is gradual deflation over time, instead of inflation — that is, prices decrease over time, rather than increase. And now you’re looking to buy a house. The average price of a house in this reality is $500,000. But since you live in an economy with deflation, the house will cost 2% less in 12 months. Do you buy today or wait 12 months? Now let’s say you’re looking to buy something more discretionary, like a boat or jewelry or furniture or any of the billion other discretionary items we buy. It’s kind of dystopian if you think about it too hard, but motivating people to consume with inflationary pressures has been a key feature in America’s economic success. But of course, inflation can’t soar out of control. By aiming for a modest increase of 2% in prices, the Federal Reserve wants to make sure prices stay stable and people feel good about buying things. Keeping inflation at 2% also helps the Federal Reserve make decisions about interest rates, which are important for borrowing money and investing. When inflation is low, the Federal Reserve can lower interest rates to encourage borrowing and investment, which can help the economy grow. On the other hand, if inflation is too high, the Federal Reserve can raise interest rates to slow down the economy and prevent problems. Having a moderate level of inflation can help the economy because it encourages people to spend money. But it also encourages businesses to invest. When businesses expect prices to go up a little bit, they're more likely to buy things now instead of waiting. This can help businesses grow and lead to a healthier overall economy. Lastly, having a clear target for inflation helps everyone understand what to expect and make better decisions. When businesses and investors know what the Federal Reserve wants, they can plan for the future more effectively. This helps the market work better because everyone can make choices based on the same information. The Fed’s 2% long-term inflation goal is all well and good, but here’s the problem: No one knows what the Fed means by “long term” — in fact, the Fed doesn’t even know. This Pill Will “Define the Next Decade” A new medical breakthrough smaller than the size of your pinkie is about to reshape human history. Because believe it or not, this tiny pill can eradicate every single sign and symptom of aging and disease... Which leaves you looking and feeling forever young. Don’t believe it? [Check out this proof...]( As far as I can tell, the Federal Reserve does not have a set definition for how long "long-term" is when it comes to inflation. And that’s a problem. What does it mean? Five years? Ten years? Twenty years? It matters a lot. The average annual inflation rate over the five years between 2017 and 2022 was 3.86%. But if we look over the past 10 years between 2012 and 2022, we find the average annual inflation rate is 2.79%, which is closer to the Fed's goal. If we go back 20 years, from 2002–2022, the average annual inflation rate goes back up to 3.10%. My point is depending on what the Fed actually means by "long term" should be a guide to its policy decisions. But without that standard definition, I’m not even sure how the Fed justifies its rate decisions. If we consider 12 years specifically to be “long term,” the average annual inflation rate was 2.18% from 2015–2022. By that measure, the Fed has very little to do. I’m sure you can see the problem. On one hand, not having a set definition of "long term" gives the Fed flexibility to change its plans based on what's happening. On the other hand, investors rely on clear guidelines and expectations to make informed decisions. The ambiguity of what the Fed means by “long term” can complicate investment planning, making it challenging to assess the potential risks and returns accurately. Moreover, it calls into question how the Fed justifies decisions, which is undermining to confidence. it's looking at and planning for the “long term,” but it doesn't give any good explanation of what that means. I think that having a clear definition for “long term” is best for investors so we can understand the Federal Reserve's plans. If you agree, [tweet]( this article to the Fed with the hashtag #OpenFed and let them know that it's important to be clear about their "long-term" meaning. Until next time, [Luke Burgess Signature] Luke Burgess [icymi oc]( Why I Never Got a TESLA In 2014, my neighbor bought his first Tesla. He even built a charging station in his garage. When he took longer drives, he would map it out so he could charge his Tesla. Knowing my luck, I would be stuck somewhere out in no man's land without a charger in sight. Fast-forward to 2023, and you can find charging stations pretty much everywhere. The Biden administration is pushing tighter emissions controls to get automakers to switch more of their production to electric. And thanks to the green funding in the Inflation Reduction Act, tons of money is going into the sector, further encouraging domestic production of EVs and the components that make them go. That also means a charger in every parking spot — and that, my friend, is where the money is. You see, there are a lot of companies out there that want a piece of the stimulus being offered both here in the United States and abroad, and they’re racing to get ahead of the game by installing EV charging units. From grocery stores to service stations to truck stops to shopping centers, they’re competing to see who can get the most money out of all these new government handouts and stimulus programs. You see, included in the Inflation Reduction Act, along with the generous credits consumers can earn with the purchase of a new EV, are also very generous credits for corporations that install EV charging units. Companies can now get paid back as much as $30,000 for every EV charger they install. And for companies installing hundreds and even thousands of those chargers, that adds up to a LOT of money! Many of these companies are passing some of their stimulus on to their investors. They’re called real estate investment trusts, or REITs, and they get special tax treatment from the IRS because of that structure. But they only get to keep that status and special treatment if they pay out the majority of their profits to investors like you. And when I say the majority, I’m talking about AT LEAST 90% of all pretax profits. For multibillion-dollar operations like these, those distributions add up to serious cash. The next expected payout is scheduled on July 19. That’s only a week away! [Here are all the details.]( Follow the Outsiders [Twitter]( | [Facebook]( | [LinkedIn]( | [YouTube]( This email was sent to {EMAIL}. You can manage your subscription and get our privacy policy [here](. 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